Organized retail crime (ORC) continues to be staggeringly high. ORC losses averaged over $700,000 per $1 billion in sales in 2020, but it’s no secret that the pandemic-fueled shift to digital has continued to exacerbate the problem, especially during peak shopping seasons like the holidays. Additionally, more than two-thirds of retailers said the pandemic increased their organization's overall risk, and 57% indicated a rise in ORC.

Increased foot and e-commerce traffic inevitably bring opportunities for bad actors to target stores and take advantage of their lenient policies, and reports already show that nearly 11% of e-commerce returns from the 2021 holiday season have been deemed as fraudulent. 

So how can retailers spot fraud and work to prevent it? Let’s break it down.

BOPIS fraud. According to NRF's 2021 retail security survey, 39% of retailers said multichannel sales like buying online picking up in-store (BOPIS) was the most significant source of increased fraud — up nearly 20% from the previous year.

It makes sense that criminals would capitalize on BOPIS programs because they can (in some cases) quickly close out a transaction without presenting a credit card or ID and drive away with an item they never paid for. In addition, BOPIS allows fraudsters to steal without ever entering the store or visiting the website.

Returning used or stolen merchandise. Many fraudsters capitalize on omnichannel capabilities by stealing and selling across multiple channels, oftentimes with the same retailer. Another growing omnichannel retail fraud trend involves returning stolen merchandise without receipts and claiming the item was a gift or defective. In some cases, fraudsters will receive a full refund without returning anything at all. 

As an example, a fraudster might say the product was broken or didn't function properly and then return a box of rocks that weighs about the same amount as the item in question. This is particularly common among electronics like TVs and smartphones. Unfortunately, retailers often miss these cases because they initiate online refunds based on tracking numbers before inspecting the contents of the returned box, or their software is not sophisticated enough to track serial numbers of the originally sold item.

Smishing, phishing and pharming. These silly-sounding terms describe serious and rampant threats to both retailers and consumers. Smishing is the attempt to steal people's logins and financial data by sending a text message that tricks them into clicking a link or sharing private details. The attack takes its name from phishing schemes, which "fish” for an email response that leaves the victims vulnerable to theft. Both are damaging, but smishing messages arrive directly on the phone, making them much more effective at achieving their goal. According to a study by Proofpoint, smishing and phishing attacks have increased by almost 700% since the beginning of the year.

Pharming is another major issue. This is where online scammers manipulate a legitimate website’s traffic to steal the private information of that site's customer. Essentially fraudsters create a fake website that mimics a real one and redirect users to provide private information on that platform.

As a result, criminals gain access to bank accounts and credit card details, allowing them to make illegal purchases, fraudulent returns, or resell items to other thieves on the dark web. In addition, some people use stolen information to buy gift cards, which they use to purchase items and sell them at a discount.

Chargeback fraud. Chargeback fraud is widespread in e-commerce purchases. A shopper will buy something online using their credit card, and once they receive the order, they will dispute the charge with their card provider claiming they either never received the item or that they didn't personally authorize the purchase. According to a recent report from Sift, and their network of 34,000 e-commerce websites, average daily chargeback claims increased by 19% from 2020 to 2021, and the average amount increased by 21% to about $293 per claim.

Sift also surveyed consumers to determine the extent of the issue. The report found that nearly one in five have committed chargeback fraud. In addition, one in ten consumers admitted to chargeback fraud to get money back on their holiday purchases.

What Retailers Can Do to Stop the Loss

E-commerce fraud alone surpassed $20 billion in 2021, an 18% jump from 2020. As a result, retailers can no longer consider this loss a cost of doing business — retailers must take significant preventative measures.

Retailers can minimize retail fraud by investing in top-level identification software, allowing them to verify customers’ identities and implement “red flag” alerts of suspicious activity like inconsistent billing and shipping information. Advanced POS systems are the first line of defense for both online and in-store purchases. In fact, a NRF survey indicated half of all retailers are allocating more resources toward other technology while another 50% are explicitly investing in machine learning and AI systems for loss prevention.

Rethink policies. Returns policies are possibly the most significant determining factor for how much fraud a retailer will face. Organizations that offer lenient terms and various methods become vulnerable to fraud. Of course, convenient returns policies are also essential to inspiring more purchases, but retailers are starting to realize they can create stricter rules without sacrificing consumer loyalty.

Some things that retailers can do to mitigate fraudulent returns include inspecting the item and ensuring tags are intact before issuing a refund; setting returns windows between 30-90 days; creating a standard to only accept returns with a valid receipt, ID and corresponding payment method; and monitoring and restricting customers who return too frequently.

Hire right, train well. Employees are critical to preventing in-store purchase and returns fraud for multiple reasons. For one, honest, well-trained employees can look for warning signs and alert management or the loss prevention team when they see suspicious behavior. Conversely, dishonest employees can exacerbate the problem by issuing false refunds, skimming off the top, and giving away merchandise to friends and family.

Store associates must also receive training on loss prevention to spot common signs of fraud. For example, hesitation when providing personal information can be a tell-tale sign of a scam. Additionally, rush purchases and random orders can indicate fraud. According to Visa's guidelines, customers who don't seem to care what color or style they get and buy in bulk may be using stolen payment information with plans to resell those items online.

Keep receipts. One of the best methods to combat chargeback fraud is to keep tight records. When a customer initiates a claim, retailers then have the proof to verify the transaction was real. Documents include POS records, signatures, credit card verification, IP address information, and delivery validation.

Retailers can also implement systems to prevent chargebacks from taking place by verifying higher than average transactions, flagging unusual activity, and verifying the customer's billing address before processing the transaction.

The Bottom Line

The digital age has significantly impacted retailers' risk landscape, making fraud an even more significant threat during the post-holiday returns season and throughout the year. Advanced monitoring technology is a highly effective strategy, but omnichannel retailers must also consider a multipronged approach that includes stricter returns policies and enhanced employee training.

Erik Austin is corporate director of safety and security at goTRG.